Okay, It's a Rally: But How Large and How Long?
Sentiment matches the financial environment -- no one has seen anything like it
By Robert Folsom
Thu, 12 Mar 2009 17:15:00 ET    Email |  Print  |  RSS Feeds Generated by 
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When the major U.S. equity markets lose some 55% of their value in a span of 17 
months, even as prospects for the economy turn just as alarming if not worse, 
it is no surprise to see investor sentiment reach negative extremes.
And, in fact, two of the most closely watched measures of sentiment have very 
recently shown readings that do indeed match the current financial environment 
-- which is to say, nobody has seen anything like it before.
Yet if historic levels of negative sentiment are no surprise, here's what 
should be even less surprising: The stock market will mount an authentic rally. 
As for why this is no surprise, the short answer is quite simple: Everyone who 
wants to sell has done so. At least for the time being.
Do the point gains in this week's market suggest a rally of the "authentic" 
kind? Well, several measureable and anecdotal indicators suggest strong 
skepticism about whether the rally can last, which increases the likelihood 
that it will. The more important question is, how large and for how long?
The Short Term Update has been calculating an answer to this question since 
late last month. Here's an except from the February 27 commentary:
The lessening in the intensity of selling pressure is occurring with some 
measures of market optimism virtually nonexistent.... This exceedingly low 
level of optimism marks a record extreme dating back to April 1987, when the 
data series started. What stood out...today was the spike in NYSE volume, which 
data came in at 2.24 billion shares traded. The increase may signal the start 
of some type of capitulation phase, whereby share prices fall hard into a ... 
That same STU also said, "Let's discuss when this low might occur" -- and that 
discussion continued right into the most recent STU (March 11), complete with 
charts, specific price targets, and a detailed look at the Elliott Wave pattern 
and relevant technical indicators.

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